2/23/2009 @ 3:40PM

Boss Got Raise As Philly Papers Tanked

As the parent company of The Philadelphia Inquirer and Daily News slid toward the Chapter 11 bankruptcy filing it made over the weekend, one employee did well on the pay front: CEO
Brian P.
Tierney
Brian P. Tierney
.

Documents filed Sunday by Philadelphia Newspapers LLC and seven affiliates said that the pay of Tierney, a public relations executive who put together the investment group that bought the paper from
McClatchy
in June 2006 for $562 million, was boosted just two months ago by 38% to $850,000.

But an affidavit by Richard R. Thayer, executive vice president, finance, said the company was still saving money because Tierney “without an increase in compensation” became publisher of both papers in the fall of 2006 after the $565,000-a-year incumbent resigned. Even though Tierney in January 2008 demanded a 10% cost concession from workers, his own pay was bumped up 3% in May 2008 to $618,000. Then came the big boost around Christmas.

The Inquirer and Daily News join a growing list of newspapers forced into bankruptcy after sharp declines in advertising destroyed their ability to service big debts taken on when they changed hands. A day earlier,
Journal Register Co.
, parent of Connecticut’s New Haven Register and 178 other weekly and daily newspapers, sought bankruptcy-court protection. The same fate befell the Minneapolis Star Tribune last month. In December, Tribune Co., whose holdings include the Chicago Tribune, Los Angeles Times and Newsday, filed for Chapter 11 bankruptcy protection. All newspapers have suffered sharp ad revenue declines due to Internet competition and the recession, but those that recently changed hands in leveraged deals are the most vulnerable.

The bankruptcy threatens to wipe out the $150 million equity investment made by Tierney’s group, which included local labor unions and business interests. It also raises the prospect of big losses by the lenders that provided the balance of more than $400 million in debt financing. The list of largest unsecured creditors was topped by
Royal Bank of Scotland
, which is owed $22 million. As of Jan. 31, the company said it still owed $395 million to lenders.

“The debtors’ assets and going concern value are worth less today than they were worth in 2006,” Thayer wrote. He added that Philadelphia Newspapers had 2008 free cash flow–before interest, taxes, depreciation or amortization–of $36 million. That is expected to drop 31% to $25 million this year, Thayer wrote. It is from cash flow that debt-servicing payments are made.

Thayer’s statement hints at hard-ball tactics on all sides as Tierney’s team fought to restructure its finances outside of court. A Tierney request in November for $20 million in equity investment from lenders was rejected. Then this month, Thayer wrote, lenders countered with a proposal that the money be a loan and demanded an answer to their proposal within 48 hours–and without providing a copy of the paperwork describing fees for their loans.

In a memo to employees, Tierney said the company has asked the hometown bankruptcy court to allow payments of benefits and pensions. A bankruptcy filing usually halts such payments, at least initially. In recent years, many employees of the Inquirer and Daily News have taken buyouts or have been laid off.

Thayer’s affidavit says Tierney’s management has “dramatically improved the operations.” But one thing not specified was print circulation numbers of the Inquirer and Daily News, both Pulitzer Prize-winning newspapers. Latest audited figures put their combined daily circulation at 398,000, on the order of half what it was when the papers’ main competition, The Philadelphia Bulletin, went out of business in 1982.